Intermediate accounting 15e kieso warfield chapter 11

11-7 LO 2 Identify the factors involved in the depreciation process.Depreciable Base for the Asset Factors Involved in the Depreciation Process Illustration 11-1 Depreciation—Method of C

Trang 1

Prepared by Coby Harmon University of California, Santa Barbara

Intermediat

e Accounting

Intermediat

e Accounting

Westmont College

INTERMEDIATE ACCOUNTING

F I F T E E N T H E D I T I O N

Westmont College

kieso weygandt warfield

team for success

Trang 2

PREVIEW OF CHAPTER

Intermediate Accounting

15th Edition Kieso Weygandt Warfield

11

Trang 3

After studying this chapter, you should be able to:

LEARNING OBJECTIVES

1 Explain the concept of depreciation.

2 Identify the factors involved in the

11

Trang 4

Allocating costs of long-lived assets:

 Fixed assets = Depreciation expense

 Intangibles = Amortization expense

 Natural resources = Depletion expense

Depreciatio n is the accounting process of allocating the cost

of tangible assets to expense in a systematic and rational

manner to those periods expected to benefit from the use of

the asset.

Depreciation—Method of Cost Allocation

LO 1 Explain the concept of depreciation.

Trang 5

11

Trang 6

11-6 LO 2 Identify the factors involved in the depreciation process.

Factors Involved in the Depreciation Process

Three basic questions:

(1) What depreciable base is to be used?

(2) What is the asset’s useful life?

(3) What method of cost apportionment is best?

Trang 7

Depreciable Base for the Asset

Illustration 11-1

Trang 8

Estimation of Service Lives

 Service life often differs from physical life.

 Companies retire assets for two reasons:

1 Physical factors (casualty or expiration of

Trang 9

Some companies try to imply that depreciation is

not a cost For example, in their press releases

they will often make a bigger deal over earnings

before interest, taxes, depreciation, and

amortization (often referred to as EBITDA) than

net income under GAAP They like it because it

“dresses up” their earnings numbers Some on

Wall Street buy this hype because they don’t like

the allocations that are required to determine net

income Some banks, without batting an eyelash,

even let companies base their loan covenants on

EBITDA

For example, look at Premier Parks, which

operates the Six Flags chain of amusement

parks Premier touts its EBITDA performance

But that number masks a big part of how the

company operates—and how it spends its

money Premier argues that analysts should

ignore depreciation for big-ticket items like roller

coasters because the rides have a long life

Critics, however, say that the amusement

industry has to spend as much as 50 percent of

its EBITDA just to keep its rides and attractions

current Those expenses are not optional—let the

rides get a little rusty, and ticket

WHAT’S YOUR PRINCIPLE ALPHABET DUPE

sales start to tail off That means analysts really should view depreciation associated with the costs of maintaining the rides (or buying new ones) as an everyday expense It also means investors in those companies should have strong stomachs What’s the risk of trusting a fad

accounting measure? Just look at one year’s bankruptcy numbers Of the 147 companies tracked by Moody’s that defaulted on their debt, most borrowed money based on EBITDA

performance The bankers in those deals probably wish they had looked at a few other factors On the other hand, nonfinancial companies in the S&P 500 generated a substantial EBITA margin of 20.9 percent in

2011 Some analysts are concerned that such a high number suggests that companies are

reluctant to incur costs and want to stockpile cash The lesson? Investors will do well to avoid focus on any single accounting measure.

Source: Adapted from Herb Greenberg, “Alphabet Dupe: Why EBITDA Falls Short,” Fortune (July 10, 2000), p 240; and V Monga, “Operating Efficiency Runs High at U.S Firms,” Wall Street Journal (February 28, 2012), p B7.

Trang 10

11

Trang 11

11-11 LO 3 Compare activity, straight-line, and

decreasing-charge methods of depreciation.

The profession requires the method employed be “systematic

and rational.” Methods used include:

5 Group and composite methods

6 Hybrid or combination methods

Decreasing charge methods

Special methods

Trang 12

11-12 LO 3

Activity Method

Illustration: If Stanley uses the crane for 4,000 hours the first

year, the depreciation charge is:

Trang 14

Decreasing-Charge Methods

Stanley Coal

Mines Facts

Sum-of-the-Years’-Digits Each fraction uses the sum of the

years as a denominator (5 + 4 + 3 + 2 + 1 = 15) The numerator

is the number of years of estimated life remaining as of the

beginning of the year

sum-of-the-LO 3

Trang 15

11-15 LO 3 Compare activity, straight-line, and

Sum-of-the-Years’-Digits

Trang 16

 Utilizes a depreciation rate (percentage) that is some multiple

of the straight-line method

 Does not deduct the salvage value in computing the

depreciation base

LO 3 Compare activity, straight-line, and

Trang 17

Declining-Balance Method

Trang 18

Illustration—(Four Methods): Maserati Corporation purchased a

new machine for its assembly process on August 1, 2014 The cost

of this machine was $150,000 The company estimated that the

machine would have a salvage value of $24,000 at the end of its

service life Its life is estimated at 5 years and its working hours are

estimated at 21,000 hours Year-end is December 31

Instructions: Compute the depreciation expense under the

Trang 19

Current

Advance slide in presentation mode to reveal answer.

Trang 20

($126,000 / 21,000 hours = $6 per hour)

Hours Rate per Annual Partial Year Accum.

Year Used Hours Expense Year Expense Deprec.

Journal entry:

2014 Depreciation expense 4,800

Accumultated depreciation 4,800

LO 3

Activity Method (Assume 800 hours used in 2014)

Trang 21

Sum-of-the-Years’-Digits Method

Current

Trang 22

Double-Declining Balance Method

Current Depreciable Rate Annual Partial Year

Trang 23

11

Trang 24

11-24 LO 4 Explain special depreciation methods.

Two methods of depreciating multiple-asset accounts exist:

Special Depreciation Methods

 Group method used when the assets are similar in nature

and have approximately the same useful lives

 Composite approach used when the assets are dissimilar

and have different lives

The choice of method depends on the nature of the assets involved The computation for group or composite methods is essentially the

same: find an average and depreciate on that basis.

Trang 25

Illustration: Mooney Motors establishes the composite

depreciation rate for its fleet of cars, trucks, and campers as

shown below

Group and Composite Methods

Trang 26

If Mooney retires an asset before or after the average service life

of the group is reached, it buries the resulting gain or loss in the

Accumulated Depreciation account

Illustration: Suppose that Mooney Motors sold one of the

campers with a cost of $5,000 for $2,600 at the end of the third

year The entry is:

Accumulated Depreciation 2,400

Cars, Trucks, and Campers 5,000

Trang 27

If Mooney purchases a new type of asset (mopeds, for example),

it must compute a new depreciation rate and apply this rate in

subsequent periods

Disclosure of Group Depreciation Method

Trang 28

Hybrid or Combination Methods

Companies are also free to develop tailor-made depreciation

methods, provided the method results in the allocation of an

asset’s cost over the asset’s life in a systematic and rational

manner.

Special Depreciation Methods

Disclosure of Hybrid Depreciation Method

Trang 29

Which depreciation method should

management select? Many believe that the

method that best matches revenues with

expenses should be used For example, if

revenues generated by the asset are

constant over its useful life, select

straight-line depreciation On the other hand, if

revenues are higher (or lower) at the

beginning of the asset’s life, then use a

decreasing (or increasing) method Thus, if

a company can reliably estimate revenues

from the asset, selecting a depreciation

method that best matches costs with those

revenues would seem to provide the most

useful information to investors and creditors

for assessing the future cash flows from the

asset

Managers in the real estate industry face a

different challenge when considering

depreciation choices Real estate

WHAT’S YOUR PRINCIPLE DECELERATNG DEPRECIATION

managers object to traditional depreciation methods because in their view, real estate often does not decline in value In addition, because real estate is highly debt-financed, most real estate concerns report losses in earlier years of operations when the sum of depreciation and interest exceeds the

revenue from the real estate project As a result, real estate companies, like Kimco Realty, argue for some form of increasing- charge method of depreciation (lower depreciation at the beginning and higher depreciation at the end) With such a method, companies would report higher total assets and net income in the earlier years of the project.

LO 4 Explain special depreciation methods.

Trang 30

1 How should companies

compute depreciation for partial periods?

2 Does depreciation provide for

the replacement of assets?

3 How should companies

handle revisions in depreciation rates?

Special Depreciation Issues

See slides for

LO 3

Funds for the replacement of assets come from

revenues.

Trang 31

 Changes in estimates are a continual and inherent

part of any estimation process.

 Accounted for in the current period and prospective

periods.

 No change to previously reported results.

Revision of Depreciation Rates

Trang 32

Questions:

 What is the journal entry to correct

the prior years’ depreciation?

 Calculate the depreciation expense

for 2014.

No Entry Required

Arcadia HS, purchased equipment for $510,000 which was

estimated to have a useful life of 10 years with a residual value

of $10,000 at the end of that time Depreciation has been

recorded for 7 years on a straight-line basis In 2014 (year 8), it

is determined that the total estimated life should be 15 years

with a residual value of $5,000 at the end of that time.

Trang 33

Accumulated depreciation 350,000 Net book value (NBV) $160,000

Balance Sheet (Dec 31, 2013)

After 7 years

Equipment cost $510,000

Salvage value - 10,000

Depreciable base 500,000

Useful life (original) 10 years

Annual depreciation $ 50,000 x 7 years = $350,000

Trang 34

Net book value $160,000

Salvage value (new) 5,000

Depreciable base 155,000

Useful life remaining 8 years

Annual depreciation $ 19,375

Depreciation Expense calculation

for 2012.

Depreciation Expense calculation

for 2012.

Journal entry for 2012

Revision of Depreciation Rates After 7 years After 7 years

Trang 35

The amount of depreciation expense

recorded depends on both the depreciation

method used and estimates of service lives

and salvage values of the assets

Differences in these choices and estimates

can significantly impact a company’s

reported results and can make it difficult to

compare the depreciation numbers of

different companies

For example, when Willamette Industries

extended the estimated service lives of its

machinery and equipment by five years, it

increased income by nearly $54 million.

An analyst determines the impact of these

management choices and judgments on

the amount of depreciation expense by

examining the notes to financial

statements For example, Willamette

Industries provided the following note to its

financial statements.

WHAT’S YOUR PRINCIPLE DEPRECIATION CHOICES

During the year, the estimated service lives for most machinery and equipment were extended five years The change was based upon a study performed by the company’s engineering department, comparisons to typical industry practices, and the effect of the company’s extensive capital investments which have resulted in a mix of assets with longer productive lives due to technological advances As a result of the change, net income was increased by $54,000,000.

Trang 36

11

Trang 37

Events leading to an impairment:

a Significant decrease in the fair value of an asset

b Significant change in the manner in which an asset is used

c Adverse change in legal factors or in the business climate that

affects the value of an asset

d An accumulation of costs in excess of the amount originally

expected to acquire or construct an asset

e A projection or forecast that demonstrates continuing losses

associated with an asset

Impairments

LO 5

When the carrying amount of an asset is not recoverable, a

company records a write-off referred to as an impairment

Trang 38

Impairments

1 Review events for possible impairment

2 If the review indicates impairment, apply the recoverability

test If the sum of the expected future net cash flows from the long-lived asset is less than the carrying amount of the asset,

an impairment has occurred

3 Assuming an impairment, the impairment loss is the amount

by which the carrying amount of the asset exceeds the fair value of the asset The fair value is the market value or the present value of expected future net cash flows

Measuring Impairments

LO 5 Explain the accounting issues related to asset impairment.

Trang 39

11-39 LO 5

Graphic of Accounting for Impairments

Impairments

Loss reported as part of

income from continuing

operations, in the “Other

expenses and losses”

section.

Định dạng
Số trang	79
Dung lượng	3,91 MB